The freelancer vs. contractor vs. employee classification is something employers at large companies generally pay attention to as part of their tax strategy to save money. It’s not something small service business owners like yourself usually give much thought to.
But perhaps it’s time you paid attention to the freelancer vs. contractor vs. employee classification — particularly as the proper classification means you can access certain benefits, have clarity on your work title and better understand your relationship with your client.
In this article learn almost everything you need to know about this classification:
A freelancer is a self-employed person who:
Common freelance professions include copywriters, transcribers, editors, web developers, designers and even photographers.
The term “independent contractor” and “freelancer” are often used interchangeably, but as you’ll see, the two are actually different. But first, some similarities…
They’re also self-employed and responsible for handling their own employee benefits (health care, disability insurance, income protection, unemployment insurance, etc.) and completing their own self-employment tax returns.
Though uncommon, this arrangement may differ if the contractor works through an agency.
But there are some differences: Contractors do tend to work a little differently compared to freelancers. For instance, they generally work on only one large project at a time with a single client. And this work may happen remotely or, more commonly, in the client’s offices/on-site.
Contractors are common in the construction and IT industries, but also in business consulting and some creative fields.
An employee is someone who:
By now, you can probably tell the differences between a freelancer vs. contractor vs. employee. But just in case you need a little more clarity, below is a freelancer vs. contractor vs. employee table, which summarizes the similarities and differences across 13 characteristics.
You’ll notice that employees differ from freelancers and contractors in every characteristic, and that freelancers and contractors only differ in four:
There is one essential difference between freelancers and contractors when compared to employees that you need to take specific note of: control over how the job is done.
According to the IRS, the independence of the worker plays a crucial role in determining status. If an employer specifies precisely how, when and where the job should be done, it’s probably an employer-employee relationship. This distinction holds true whether the work is part-time or temporary and regardless of how short the working relationship is.
At first glance, you may feel like the proper worker classification doesn’t really matter. After all, who cares about what you’re called when you have a gig and you’re getting paid, right?
The truth, though, is that the correct classification matters for several reasons—and no, it’s not just about achieving clarity on your work title and relationship with your client.
Firstly, proper classification informs you and employers how taxes will be managed. If an employer classifies you as an independent contractor, they will not have to withhold any income, social security, and Medicare taxes on any wages and salaries. You, in turn, will be fully responsible for reporting and taking care of your self-employment tax.
Secondly, the incorrect classification could mean you’re missing out on certain employee benefits. For example, if you’re an employee who has been misclassified as a contractor, you’ve lost out on health care, workers’ comp, overtime pay, and any other employee perks like sick and vacation days.
Thirdly, it helps you understand client expectations and set your own. Knowing and understanding how the language is used helps you understand client expectations when they’re hiring you. On the flip side, if you yourself are hiring, you can be crisp on what to call your hires!
Finally, the IRS is always on the lookout for cases where companies have improperly classified workers. If they discover employers have made an incorrect classification, they could face legal and financial consequences. For instance, chances are high that the employer will have to pay back taxes.
Speak to your employer or client and ask them to review your classification with the IRS. In most cases, improper classification is simply an error that results from ignorance or confusion around the rules and not because an employer is purposefully trying to break the law.
So, when approaching your employer or client for reclassification, do so from a place of understanding and give them the information they need to justify their classification with the IRS. Two significant pieces of information they will usually ask for are your business structure (LLC or sole proprietorship) and the number of clients you work with.
If your employer still chooses to do nothing after you’ve alerted them to the situation, contact the IRS to review your employment status. When doing so, you’ll need to complete an IRS form SS-8.
By now, you should have a fairly good idea of what your status is, but if you’re still unsure and need a little help, then read on…
In this final section, you’ll learn how to properly classify yourself by focusing on three core categories as laid out by the IRS: behavioral control, financial control and relationship type.
As you read through this final section, keep the following in mind:
To determine whether you’re an employee or an independent contractor, consider these three factors:
1. Behavioral Control
If the employer has the right to control and direct your work, chances are it is an employer-employee relationship. This distinction holds true whether the employee chooses to exercise that right or not. There are several subcategories you should pay attention to here:
2. Financial Control
The more your client controls the financial aspect of your job, the higher the chances of you being an employee. Some factors to consider here include:
The relationship between worker and employer also helps you determine your status. Essential factors to consider include:
The freelancer vs. contractor vs. employee classification is more important than you might think. It ensures you’re not losing out on any benefits, gives you clarity on your work title, guarantees you remain on the right side of the law and helps you understand how to manage your taxes.
Given how vital your status actually is, it seems only fitting that you arm yourself with the right information to determine yours. This post provided you with that information—from the definitions and differences between freelancers, contractors and employees, to what to do if you’ve been misclassified and how to determine your status.